The latest federal income data show what looks on the surface like robust economic gains, with Americans reporting 4.6% more income in 2014 than 2013. But that’s misleading.
My analysis of the official data reveals that just beneath the shiny surface lies an ugly picture. A few Americans are seeing their incomes soar, and the top 15% or so are doing well overall. Meanwhile, the vast majority tread water or slowly sink, an economic reality that has fueled support for both Donald Trump and Senator Bernie Sanders.
This disparity, which I have been documenting for more than two decades, reflects government policies that subtly take from the many and redistribute upward to the already very rich few; the downward pressure on wages due to globalization; and the decline of unions, which had given workers bargaining power so they enjoyed a larger share of business revenues.
What the Numbers Show
My analysis uses inflation-adjusted 2014 dollars. I also averaged data for 2012 and 2013 for comparison with 2014. That’s because Congress raised tax rates in 2013, prompting many high-income Americans to report more money in 2012 and much less in 2013.
Among my findings from analyzing the official data:
Income per American reported on tax returns in 2014 was $30,320, or $693 less than in the year 2000.
Wages, salaries and bonuses account for about 70 cents on each dollar of income that American report on their tax returns.
Ten percent of all the increased pay earned by everyone in America was awarded to just 130,500 people, who each earned $1 million or more in salaries and bonuses in 2014, Social Security Administration data show. Put another way, one worker in about 1,200 got a dime out of each dollar of higher pay nationwide.
Wage gains in 2014 were heavily weighted to the top 15% of workers. Those making more than $75,000 collected 93% of all the increased pay in 2014, compared to 2012-13.
The 135 million workers making less than $75,000 got an average raise of just 7 cents an hour before taxes, not that anyone would notice.
Slightly more than half of America’s workers made less than $30,000; their average 2014 gross pay was $1,050 per month.
While the IRS reported that capital gains rose 34% by comparing 2014 to 2013, when 2012 and 2013 are averaged the 2014 gains were up only by a fraction of 1% (remember that 2013 had lower-than-normal income because wealthy Americans pushed as much income as possible to the lower-tax year of 2012).
Capital gains are the most highly concentrated major source of income, with 58% of gains being reported by those making $1 million or more—and more than half of that by the roughly 13,000 households making $10 million or more annually.
Dividends rose at more than three times the rate of wages. Since 2000, dividends paid to stockholders have increased 90% in real terms.
Income from capital—dividends and capital gains—is going to a shrinking portion of taxpayers. The share of taxpayers reporting capital gains fell from 12% in 2000 to 8% in 2014; dividends declined from 26% of taxpayers to 19% over the same years.
What these numbers show is that two small groups of Americans are improving their economics while the vast majority struggles.
The Two Groups Who Won
The larger small group is workers with sophisticated skills, especially those who can command $100,000 to $400,000 a year. That pay level includes many physicians, lawyers, bankers, financial analysts and managers of enterprises owned by investors, nonprofits and government.
More than three-quarters of all increased pay from 2000 through 2012 went to this group, comprised of about 7% of workers. Their gains continued in 2013 and 2014.
This small group enjoys rising incomes because—thanks to education and their refined ability to use math, science and reading—they are in demand by the private, nonprofit and government sectors.
The second group doing well consists of those already rich enough to own stocks, whether privately held or publicly traded.
That huge boost in dividends since 2000 is one factor. Back in 2000, taxpayers reported $202 billion of dividends, measured in inflation-adjusted dollars. In 2014, they reported almost $385 billion. As the share of taxpayers reporting any dividends has shrunk, these figures mean that dividends per taxpayer reporting this form of income more than doubled during the first 14 years of this century.
What About Everyone Else?
While the highly educated and already well-off prosper, average incomes on tax returns have fallen since 2000 by $2,620—or almost 4%—to $65,021 last year.
Since the year 2000, average incomes on tax returns grew in only two years: 2006 and 2007. Even then, the increases were tiny.
Had American incomes stayed at the level of 2000 and grown in tandem with the population, Americans would have enjoyed $7.8 trillion more pre-tax income over the next 14 years. That’s more than $53,000 of income per taxpayer that never materialized—more than enough money to pay off all the automobile, credit card and student loans in America and (after income and payroll taxes) leave each taxpayer with about $20,000.
Redistributing Income Upward
A big reason for average incomes in 2014 being smaller than in 2000 is subtle policies that take from the many and redistribute upward. Taxpayers now provide many businesses with much of their capital for new investment—whether it’s moving the corporate headquarters to a different state (Boeing, General Electric, AMC Theaters); building new factories (BMW, Boeing, Mercedes); or letting owners escape property taxes (one example: Donald Trump) or pocket the state income taxes paid by workers without their knowledge (Ford, Google, Nissan).
Wages are down because of Congressional hostility to unions, which are common among America’s major economic competitors.
Labor’s share has been falling ever since government policy turned against unions. Put average wages and union membership into a graphic for the last four decades and the declines track closely. That’s because without unions most workers have no bargaining power. A clerk, teacher, airline pilot or street cop is basically a commodity. One person can easily be replaced with another.
Congress has enacted myriad little laws, together with many more regulations adopted by agencies, that together weight the economy in favor of capital and against labor. Labor’s share of nonfarm private sector income is now nearly 10% below where it was in 2000, St. Louis Federal Reserve data shows.
Globalization also plays a role, as workers with all-in costs to employers of $40 an hour can be replaced with those requiring all-in costs of a tenth that much by moving manufacturing to China, Vietnam and other low-wage countries. Of course that only works for large-scale enterprises, not mom-and-pop or most family-owned manufacturing.
And, of course, tax cuts play a big role in the rich getting richer while the rest tread water. When your after-tax income grows faster than your pre-tax income, as has been the case in America for decades among those in the million-dollar-and-up income groups, the amount of money you can invest grows. Combine that with reduced tax rates on dividends and capital gains and no wonder top incomes keep soaring.
Ask not why so many turn to Trump and Sanders for relief. Ask why we elected people who created their desperation.
Pulitzer Prize winner and recipient of an IRE medal and the George Polk Award, David Cay Johnston is author of five books and the upcoming The Prosperity Tax: A New Federal Tax Code for the 21st Century Economy. He is a Distinguished Visiting Lecturer at Syracuse University College of Law and Whitman School of Management, and also writes for The Daily Beast and Tax Notes.